Millennials hold purse strings but investment options limited

For good reason, millennials are known to be the most technologically advanced generation of the current workforce. As such, it is a given that they have the necessary competencies to lead the African mining sector into the age of Industry 4.0.

However, it is not easy going for millennial-led start-ups to gain a foot in the door due to funding limitations. That’s because funding options have not changed in an industry set in its traditional ways of thinking.

AUTHOR: Aviona Mabaso, Group Legal Counsel. Bauba Resources

The stark reality is that funding options for mining projects have not changed. There are still basically two options: loan or equity. Most mining companies are funded on debt and rarely on equity.

That’s because a loan with interest poses a safer risk than equity for an investor- if a project goes bust, then at least the lender has a strong chance of getting (at least some of) the loan back, even if it takes some time to do so.

How do millennials, particularly those from previously disadvantaged backgrounds, become involved in start-up mining companies at ownership level?

Unless a person comes with special knowledge and skills, then there isn’t much value in them for mining companies other than to fulfil its empowerment obligations as determined by the laws of the country.

Put differently, a start-up mining company needs money and skills/knowledge, not another mouth to feed.

Production-based investment

It must be noted that applications for mining and
prospective rights require companies to show upfront where the money for a
project will come from. Most of the time these applicants use loan undertakings
or show some kind of positive cash balance.

One way that these start-ups could secure investment is through production based funding. For example, prepayments in exchange for an offtake or the cession of offtake agreements as security for a loan, are becoming increasingly popular.

It sounds simple, but practically it means you must have a buyer before you have pulled anything out of the ground.

If by some sort of miracle a millennial start-up is able to secure an offtake agreement (with or without a prepayment) prior to obtaining a mining right (to help fulfill the financial means requirement of the application), that offtake partner would not see its first delivery for at least a year or two, depending on whether it is a Greenfields or Brownfields project.

In turn, the mining company will not be able to generate its own profits until then.

As such, it would probably be more beneficial if financial
institutions lent money to small-scale mining operations based on mining
permits or even financed shareholdings in a millennial start-up company and
placed experienced mining professionals on their boards to help manage a
project.

Mining permits have the potential to create real opportunities for new and young entrants into the industry.

To make mining a more attractive sector for millennial start-ups, they should not have to provide proof of funding for projects, or at the very least, the Department of Mineral Resources and Energy (DMRE) should be a bit more lenient with regards to those companies’ financial positions.

Other options are limited

In addition, companies can turn to funding organisations to get a cash injection, particularly international donors like the International Finance Corporation (part of the World Bank) and the African Development Bank or the Industrial Development Corporation in South Africa.

No doubt, there are risks associated with organisations funding youth-entrant companies. There is always the potential for abuse of funds and ‘fronting’ for personal gain.

However, in my opinion, such behavior is indicative of shoddy moral standards of those individuals alone and as such one should not paint every young start-up with the same brush.

Another investment platform that is gaining traction is CSEF (crowd sourced equity funding). This a form of funding which enables project owners to raise funds from a large number of small investors.

Already platforms such as Canadian-based Red Cloud Klondike Strike exist, that connect owners of current mining projects of all stages with investors.

Unlike unregulated crowdfunding websites, investors would receive shares of the company when crowdfunding mining projects. This money still comes in as either a loan or equity.

Investment through cryptocurrency is also making inroads in mining, although this is more prevalent in countries such as Australia and Canada and it is yet to impact mining in Africa.

The risks involved and the regulations around this digital medium of exchange are still unclear and it will take a few years for both investors and investees to embrace financing projects using crypto-currency.

At this moment, millennial start-ups in African mining are
still reliant on investors with actual money. Sadly, for now, it remains a case
of new players, old investment options.

About the author:

Aviona Mabaso is Group Legal Counsel at Bauba where she is part of a young team of decision makers that are challenging traditional norms when it comes to operating mines. In 2019, she was named amongst Mining Review Africa’s most influential women in mining on the continent